By Shuli Ren

This could lead to the U.S.-traded Chinese companies without an auditor. In the worst-case scenario, the Chinese ADRs would have to find a new auditor; otherwise they would not be able to file financial statements, which could result in an eventual de-listing. Wall Street Journal reports:

Judge Elliot’s ruling Wednesday doesn’t take effect immediately, and the firms can appeal the ruling.

But if the ruling stands, it could temporarily leave more than 100 Chinese companies that trade on U.S. markets without an auditor.

Without audited financial statements, a company can’t sell securities in the U.S. or stay listed on U.S. exchanges.

Don’t panic! This ruling should not have any material impact on the Chinese Internet companies in the near-term. Here is J.P. Morgan China Internet analyst Alex Yao:

We don’t expect the ruling to be disruptive to China ADRs’ 2013 annual report audit, which is supposed to be filed with the SEC by 30 Apr 2014. This is because the decision to suspend the four firms is not final or legally effective until it has been fully reviewed and approved by the SEC. We expect the big four audit firms to appeal the review immediately. Before a conclusion is drawn by the SEC, the audit firms can continue to serve all their clients. This means any trading suspension of the China ADRs would not take place until May 2015 at the earliest, in the worst-case scenario.

However, “stock market is likely to overreact to this headline risk in the next few weeks given the historical precedence,” said Yao. For instance, Sina Corp.‘s (SINA) shares dropped 22% in December 2012 after the SEC started a similar case. Sina’s shares did recover after a month or so.

So what do we do about this? J.P. Morgan suggests we buy Hong Kong-listed Internet companies or those with structural stories:

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit